The Market Isn't Trying to Tell You Anything

I walked into the office yesterday evening and there was someone on CNBC talking about how the 50-day moving average of the S&P 500 rising above the 200-day moving average was telling us the market was getting ready to rise and the recovery had started. I listened to his babbling for another 2-3 minutes and couldn’t take it anymore.

We keep getting told that the market is telling us “something,” usually that the recession is going to end. For some reason, people keep repeating the bromide that the market looks out about 6 months. To that I politely say, rubbish.

Riddle me this, Batman. Did the market see the recession in October of 2007? We were already in recession and the S&P 500 was making new highs! Where was the market prescience? Did it see the 25%+ drop in January of this year? And I could go back and cite scores of examples where the market “missed” the future turning points over the past ten decades.

……

“In the short run,” St. Graham said, “the market is a voting machine. In the long run it is a weighing machine.” The voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams. And it gets it wrong as often as it gets it right.

Let’s look at this yet another way. This is an important concept, and it should be a component of your economic BS detector. The CNBC host talked in breathless terms about the importance of the 50-day average moving above the 200-day average. It means nothing until it means something, and we won’t know what that something is for some time.

- John Mauldin, “The End of the Recession?”, June 26

The market is the reflection of the buy and sell decisions of all its participants. It reflects all their varying views, philosophies, ideologies, biases, fears and emotions in proportion to their size and activity. It is not omniscient; it is people:

The prices of stocks are affected by literally anything and everything that happens in our world, from new inventions and the changing value of the dollar to vagaries of the weather and the threat of war or the prospect of peace. But these happenings do not make themselves felt in Wall Street in an impersonal way, like so many jigglings on a seismograph. What registers in the stock market’s fluctuations are not the events themselves but the human reaction to these events, how millions of individual men and women feel these happenings may affect the future.

Above all else, in other words, the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena in which men and women pit their conflicting judgments, their hopes and fears, strengths and weaknesses, greeds and ideals.

- Bernard Baruch, Baruch: My Own Story (Henry Holt & Co.: 1957), pgs. 84-5

Understand this and you’ll understand the essential nature of the market.

Comments

[Ryu Mei Co:]

I hear the CNBC's BS all the time and I have developed a knack to ignore all the noises. Once you clear the noise, it is actually quite clear where the market is heading.... and that is down.

“In the short run,” St. Graham said, “the market is a voting machine. In the long run it is a weighing machine.”

Nice quote, I will remember this.

Jul 01 05:45 AM

[TCK:]

All good points !

Still, knowing the direction or trade can more complex as sentiment ( correct or incorrect ) can drive the market for quite some time !

Jul 01 10:11 AM

[drpaul1139:]

I quite agree, the market is not telling us a dammed thing!

But the assumption that people are driving the market begs a question of what people when 1,200 institutions are the 66% market players?

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Jul 01 01:00 PM

[Fred Voetsch:]

Actually the market tells you what the market is worth right now. It's up to US to determine what it will be worth tomorrow, next week or next month.

For this I strongly suggest Dow Theory, Lowry's buying and selling pressure indicators and taking in all the REAL DATA you can get your eyeballs on. It also a good idea to listen to people who are wiser and older than you to keep you from getting too full of yourself. ;-)

Jul 01 02:01 PM